4 Critical Areas for Business Cost Effectiveness Analysis

Cost effectiveness analysis starts by accepting that there may be room
to improve your current practices. Enterprises have four core areas
where a review of processes can yield substantial changes to the
organizations overall cost effectiveness strategies:

Strategic cost management

Materials management techniques

Labor infrastructure

Process automation

Whether it is implementation of strategic cost
management in the supply chain, a change in materials management
techniques, restructuring of the labor force, or an investment in
automation that yields downstream savings, periodic review is the key
to leveraging the most bountiful cost effectiveness strategies.

Strategic Cost Management Methods

One of the keys to being able to judge the success of your cost
effectiveness analysis is to first have an overall strategic cost
management program. Without an enterprise-wide vision for cost controls,
implementing the best strategies is virtually impossible.

Whether it is the implementation of low-cost country sourcing, or a
reduction of lead times by leveraging domestic sourcing options, supply
chain methodology plays a key role in overall cost effectiveness
analysis.

Materials Management Savings

Inventory is one of the top three costs in business. Proper analysis
and review of inventory practices is one of the easiest places to
reduce cost. From improvement of inventory control practices, reducing
loss of inventory and needless purchasing, to carrying correct
inventory levels and using Economic Order Quantities, materials
management offers enterprise savings.

Some of the tools available to implement cost effectiveness
analysis include: leveraging vendor relationships, application of lean
manufacturing theory to inventory processes, subscription to
consignment-style inventory, using vendor finance solutions for
inventory, and implementation of ERP software.

Labor Infrastructure

While having more than one person capable of fulfilling a role
through cross training can be one of your cost effectiveness strategies,
true redundancy in positions is counter effective to true cost
management.

A periodic review of positions across different business units is
critical to ensuring that there are fewer areas of redundancy and that
as many functions are effectively centralized or automated.

Process Automation

Whether it is by investment in production machinery, ERP software,
full-enterprise e-procurement, a warehouse management system, or
improved labor tracking software, IT infrastructure in both the
hardware and software arenas are critical to cost effectiveness
strategies.

Process automation can be a labor-multiplier. While it requires
training and capital investments up front, over time process automation
generally provides relatively quick ROI.

Putting It All Together

First create the vision. Then start measuring the
processes. Finally, identify areas of opportunity. Once those areas are
identified, use some of the reliable and proven decision making tools
like cost benefit analysis to ensure you choose the right areas to
address first.

In a world of limited business resources, addressing
the areas with the most potential return over the shortest time defines
cost effectiveness analysis.